Companies must disclose changes in accounting policies and the

Companies must disclose changes in accounting policies and the impact of these changes in the notes to their financial statements. Access the annual report (or financial statements) for cosmetics company L’Oréal for the year ended December 31, 2009, from its website (www.loreal.com).

Instructions

Using the consolidated financial statements for L’Oreal, answer the following questions.

(a) List all changes in IFRS that L’Oreal identified in its notes to the financial statements. How were these changes in policies implemented? What was the impact on the company’s financial statements for the current and prior years, if any?

(b) Why has the company provided comparisons for four different dates for the Statement for the Financial Position?

(c) Describe any changes in presentation the company has reported.

(a)       In note 1, L’Oreal details the changes in accounting policies during the year as follows:

·         Consolidated financial statements have been prepared in accordance with the IFRS standard adopted by the EU on December 31, 2009.

·          The company only applied standards and interpretations that were compulsory in 2009.

·         IFRS 8 – Operating segments – was effective January 1, 2009 but has no impact on the presentation of segments.

·         IAS 23 – Borrowing costs – Real estate assets being constructed may be impacted by the required capitalization of borrowing costs which is effective January 1, 2009.   During the year, the company did not have any assets under construction that would qualify for these borrowing costs to be capitalized.

·         Other new standards or interpretations do not have any impact on the statements, unless specifically identified in the notes. (There is no listing of what these were.)

·         The company states that it is concerned about the Business Combination and Consolidation standards that have not been early adopted but will be for 2010.  But these concerns are not described.

·         The company also notes concerns about IFRS 9 Financial instruments which will be implemented in 2013.  But these concerns are not described.

·         Advertising and promotion expenses – IAS 38 requires that costs for samplers , non-amortizable POS and mail order catalogues now be expensed when incurred rather than on delivery to the customer.  The impact of this change is the following:

In millions of Euros	December 31, 2008	December 31, 2007	January 1, 2007
Other current assets POS and samples	-121.7	-118.5	-121.7
Deferred tax assets	26.4	25.6	25.9
Deferred tax liabilities	-6.0	-5.4	-6.0
Shareholders’ equity	-89.3	-87.5	-89.8

The prior years’ income statements have not been restated because the impact on profit or loss is not significant due to the “stability of the prepaid expenses”.

·   Immediate recognition of actuarial gains and losses related to employee benefits – L’Oreal adopted the choice to immediately recognize actuarial gains and losses in equity, rather than using the corridor approach, effective January 1, 2009.  This change had the following impact:

In millions of Euros	December 31, 2008	December 31, 2007	January 1, 2007
Provision for employee retirement	267.2	101.4	272.4
Deferred tax assets	43.8	22.4	67.4
Deferred tax liabilities	-54.0	-14.4	-26.4
Shareholders’ equity	-169.4	-64.6	-178.6

·    Customer loyalty program – IFRIC 13 provides guidance on customer loyalty programs effective January 1, 2009.  The company uses free products or gifts to customers for brand loyalty.  The implementation of this guidance results in timing differences of revenue recognition and related costs when the gift is a free catalogue product.   The impact of this change on the prior years, is as follows:

In millions of Euros	December 31, 2008	December 31, 2007	January 1, 2007
Other current liabilities	10.0	9.2	9.7
Deferred tax assets	1.6	2.0	2.1
Deferred tax liabilities	-1.0	-0.3	-0.4
Shareholders’ equity	-7.4	-6.9	-7.2

Even though profit or loss is slightly impacted, the prior year results have not been restated.

In the Statement of Changes in Equity, the company reported the impact on the opening balances for January 1, 2007 as follows:

·   Retained earnings – a decrease of €96.9 million

·   Items directly recognized in equity – a decrease of €278.6 million, and

·   Minority interest - a decrease of €0.1 million.

The balance sheet has been adjusted for January 1, 2007, December 31, 2007, and December 31, 2008 for the changes in the accounting policies noted above.

The Profit or Loss Statements have not been restated.

(b) Under IFRS, the company must provide an opening balance sheet for the earliest comparable period when restating financial information.  In this case, the company has provided the opening balance sheet as of January 1, 2007.

(c) Yes, the company has reported two changes in presentation in note 1:

·         The company now has a new statement entitled “Consolidated Statement of net profit and gains and losses directly recognized in equity”, as required by IAS 1.

·         Foreign exchange gains and losses are now included in the various line items to which they relate, rather than being grouped into a single line item.